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3QFY15 EARNINGS CONFERENCE CALL

MANAGEMENT:

Mr. V. Shankar – Managing Director & CEO

Mr. K R Venkatadri – Chief Operating Officer

Mr. Ashish Mehta – Chief Financial Officer

Tata Securities Ltd

Mr. Nikhil Gholani – Head of Institutional Equity

Institutional Research

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Moderator Ladies and Gentlemen, Good Day and Welcome to the Rallis India Limited Q3 FY’15

Results Conference Call hosted by Tata Securities Limited. As a reminder all

participants’ lines will be in the listen-only mode and there will be an opportunity for

you to ask questions after the presentation concludes. Should you need assistance

during the conference call, please signal an operator by pressing ‘*’ then ‘0’ on your

touchtone phone. Please note that this conference is being recorded. I would now like

to hand the conference over to Mr. Nikhil Gholani from Tata Securities. Thank you.

Over to you sir.

Nikhil Gholani Thank you Varuna. Very good afternoon. On behalf of Tata Securities would like to

welcome all the participants to Q3 FY’15 Earnings call of Rallis India Limited. Today we

have with us Mr. V. Shankar, Managing Director & CEO; Mr. K. R. Venkatadri – the

Chief Operating Officer; and Mr. Ashish Mehta – the CFO on the call. I will request Mr.

V. Shankar for a quick opening remarks and the highlights of the results post which we

will open the floor for Q&A. Over to you sir.

V. Shankar Thank you very much Nikhil. A very good afternoon to all of you ladies and gentlemen

and welcome to Rallis. As it is customary, I will make opening remarks on our

performance and leave enough time for a Q&A session.

As we have all seen the numbers, for the quarter profit after tax is Rs. 25.5 crores

consolidated versus Rs. 30.3 crores last year same quarter. Standalone Rs. 32.5 crores

versus Rs. 35 crores same quarter last year. We were very happy to say that we have

set a new milestone on gross sales which has crossed Rs. 1,500 crores for the year-to-

date, recording a 6% growth. For the quarter, we have crossed Rs.400 crores. Profit

after tax to date marginally up at Rs.136 crores.

So, let us reflect on the conditions around these numbers and performance. As you are

all aware that following these very turbulent south-west monsoon, Kharif season was

quite volatile in a sense and the result of that set of situation, the numbers are there

now that the food grains output fallen by 7% and across crops, there has been a sharp

fall. So, the erratic rain fall, dry spells, and reduced crop acreages; all have led to lower

Kharif yields and lower production. This coupled with lower crop prices; crop prices for

most of the crops softened, so that together they have led to lower incomes for the

farmer arising out of Kharif as if we entered into Rabi. In addition to this lower farm

income, there is also tight cash flow constraint in the market have also led by the

shortage of Urea which is also drawing out lot of cash from the market. So, this is the

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fallout of the Kharif and the situation in the market place. So, as we go down into the

Rabi, opening of Rabi; the crop acreage-to-date is actually down 5% and the monsoon

has been deficient or the departure from normal is around 33%. So, water deficit and

commodity prices have impacted the post rainy sowing across the country.

Barring wheat in a few geographies, area under Maize, Oil Seeds, and Pulses

particularly got affected. Area under these crops have dropped by over 15%. In Bihar,

the lower commodity price of Maize influence sowing and there has been a crop shift

out of Maize largely into Wheat, so which has affected the Corn which is a very

important market for this season. Similarly in Andhra Pradesh, if you look at Telengana

in particular, there has been a very sharp drop in the paddy acreage, even up to 30%.

As a result of the lower acreage, these set of conditions, demand has been muted

along with the inventory which is already there in the pipeline and therefore, as you

know our way of working is to align our sales and placements to consumption. So, all

this has resulted in volumes being a bit mute on the domestic side and we have made

sure that our focus on cash and collections is relentless and it continues.

Alongside, we also note that the international crop prices have also fallen and in a way

some of these crops which are affected by international crop prices; the cotton, corn or

soya in India also. So, that reflection is there. In the international market demand, if

you take a big country like Brazil which in fact is the #1 country for agrochemicals in

the world, Brazil has also been facing challenges. There had been delayed rains and as

a result their acreages have come under pressure whether it is corn or cotton and soya

bean; why the acreage came up, a very-very low incidence of Asian rust which is a

large draw for some of the molecules which go into the Brazil market. So, Brazil is a

very-very big market with supplies from China and India and in fact, one of our key

molecules, Acephate around this time Brazil is a big market. So, a very odd combination

that during this quarter in Q3, conditions in domestic and conditions in some of the big

international markets both have had headwinds.

Given all this, I must say we are delighted that the new products we have introduced

Hunk, ORIGIN, and some other products which we are done in the plant growth

nutrient space including our GeoGreen is steadily picking pace and has got a very

encouraging response from the farmers. One only hope that we would have got a

better chance to demonstrate the potential of these products and I am sure we will get

it going forward particularly into the coming season.

In Seeds also, we have introduced a very nice and a very-very high potential Corn

hybrid for the Bihar Maize market. But unfortunately, this season, there is we have

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seen this crop shift and even in hybrid Paddy, we have introduced two new bold

hybrids which also have been received very well. These new seeds have not got a fair

chance this season and some of our Corn sales have had to happen in markets which

are not of as high value.

Metallic sales for the quarter has been at Rs. 35 crores which is up almost 50%

compared to last year. Now taking a look at the margins’ part of it, while this is on the

sales’ side, on the margins’ side, I would say that the story is we have focused and

actually improved on the quality of our margins and in the Domestic Formulation space,

we have taken selective price increases on some of our key brands while it is not across

the board, we have been able to do it on some of our important brands. The other

thing which is also contributed to margins while it is still flowing through because of the

lead time, it the impact of the softer commodity prices, the impact of the lower crude

price and so on which touches some of our raw materials and procurement. So, that is

also some of it flows through and we do hope that in the quarters to come, we will see

more of that coming through.

On the cumulative, you see that the profit numbers have dipped a little further because

of the Q3 loss from Metahelix; while on the revenue side there has been very healthy

increase. Q3 typically is the loss quarter for Metahelix but as a result of the mix, the

geography, and the product mix which we could do in this season; that has led to the

loss in Metahelix about Rs. 4 crores higher than that of last year. I think what is more

important at this stage is to recognize that we have not relented on whether Rallis or

Metahelix to invest in our market promotions, farmer relationship, and brand building

programs, and also research and development programs which is what is helping us to

really bring in these powerful solutions every season.

The other items which also in some ways reflect into the operating numbers is couple

of charges which we had to take during the quarter. One is the charges we paid as

required per rules for the Dahej additional land which we have. In addition, we also

provided for an amount for stock related judgments to record its fair value and all in all,

if we take this and the focus we have had on working capital and cash, I would say that

it was important for us to make sure that the quality of operations are upheld and in

fact, the whatever improvement we could do, we have built that in. So, if we look at

the cumulative margins which we have till date, they show a healthy improvement.

Going forward, we do have new products lined up in our pipeline both on the Seed side

as well as Crop Protection and we are looking forward to the coming seasons actually

taking benefit of all the new offerings which we have. Our “Rallis Kisan Kutumba”

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program, our pulses program as well as “Samrudh Krishi” and other relationship

programs we have continue unabated and we continue to build and make them robust.

I want to close by having a quick word on the contract manufacturing side. I am happy

that some of the work we have been doing with new customers is beginning to bear

fruit. During the Q4, we hope to get regulatory clearance for one of the commercial

orders which we want to execute. This is a pilot order but it requires that regulatory

approval which we hope we will be able to execute in the Q4 and it is a very humble

small beginning and in a couple of other relationships we are at the advance stage of

moving it to pilot run and I am confident that over the next 12 months or so, some of

these relationships is going to start turning into to formal commercial relationship.

Thank you very much for bearing with me on these opening remarks. I will now throw

it open for question-answers, so that we could take any of your points you make in

some more detail. Thank you very much.

Moderator Thank you very much sir. Ladies and Gentlemen, we will now begin the question-and-

answer session. We have first question from the line of Balwinder Singh of B&K

Securities. Please go ahead.

Balwinder Singh Firstly, on this top line growth that top line degrowth that we have seen in the domestic

market. So, I would want to know how have exports done if you can throw some

numbers say 5%, 10% growth or whatever on the exports side.

V. Shankar As I said, on the exports side, typically, this quarter does have some orders from

countries like Brazil for our key molecules like Acephate. Now, because of the current

their own season demand pressure and inventory, some of those orders have got

muted. Fortunately, since we have got a slightly larger basket, we have also had orders

on our other molecules from some other geographies. So, overall international business

also have come up to similar level which we had planned for. Of course, I must quickly

add that both on domestic and international, we had hope that it would have been

higher, so, we did not really plan for revenue or a number anywhere lower than last

year. We did plan for a growth but that was not to happen because of all the

headwinds which I explained and therefore, within the opportunities we have been

selective in making sure that the right product mix, we are going into the right markets

with the right quality of operations, so that we do not compromise not only on the

opportunity but on the profile opportunity which we do. Now, the exact combination

and the exact number of the proportion of international business, I will share with that

once we are done with Q4 and we will declare that number for the year as a whole.

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Balwinder Singh I just I wanted to understand, have we seen like some 10%, 15% decline in domestic

volumes as such, because overall when your top line has degrown by 6% and you say

that you have taken price increases on key brand and also the fact that on a Y-o-Y

basis, prices are higher that means domestic volumes have been down by 10%, 15%

or so. Is my reading correct?

V. Shankar No, that could be one interpretation, but that is not the right interpretation because I

did not say that we have taken price increases across the board in every single product

in domestic. What I said was selectively we have taken prices. There are also brands

where we have dropped prices because of intense competition, because of price

corrections which were necessary. So, there also has been price reductions in some of

our brands and where we thought that it is important to do that correction to make

sure that our market presence is not lost. So, it is a combination of both. So, since we

have large portfolio of products Balwinder, there are products on which we have gained

volumes and gained handsomely. There are some products where we have lost

volumes. There are some products we have taken prices up; there are some products

we have even dropped prices even up to 10%. So, it is actually a combination of all of

that. So, it is not correct to say that there is a volume dip of 15%.

Balwinder Singh On this margin side if I see, gross margins have improved substantially by 600, 700 bps

this quarter. So, how much of that is sustainable going forward and does it like because

of the crude price decline given the fact that we might not have adjusted selling prices

lower still, so, are we going to take some price cuts going forward because of the crude

price decline? So, overall I just wanted to understand, how much of the gross margins

improvement is sustainable going forward?

V. Shankar See, Balwinder, I will read out the data which is in front of me and which calculations

show. If we take Rallis number, I suppose you are referring to Rallis standalone; our

EBITDA to date had gone up 70 or 80 basis points. So, I am not sure I am not able to

connect with your 600 basis points.

Balwinder Singh No sir, I am talking only about Q3.

V. Shankar I am talking about cumulative to date. So, if you take overall, our performance so far

on the Rallis standalone, our EDITDA, let say it has gone up by a 1% or so. So, that is I

am saying in the light of all these conditions, it is our focus on making sure that the

quality is not compromised and in fact we have improved on the quality of performance

and that is a reflection of all the actions we have taken on cost reductions, on price

increases as well.

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Balwinder Singh No sir, just to keep it simple, I meant the 3Q performance. We have seen substantial

growth margin improvement. Is that the 3Q margin can be replicated going forward or

how does it look like?

V. Shankar No, the Q3 number, if you look at the EBITDA margin, they are at the same level as

last year.

Balwinder Singh Gross margin.

V. Shankar I do not know whether, you will have to net off at the after all the expenditure. I do not

which line you are taken and how you computed.

Balwindar Singh Sales minus the manufacturing is...

V. Shankar All I am saying Balwinder is to take all the expenses and if EBITDA is reflective good

enough number, the number is not showing the kind of increase which you are talking

about.

Balwinder Singh What you are talking of is EBITDA margin improvement of 100 bps right? So, on the

EBITDA margin improvement, can we see sustained margin improvement over the next

couple of quarters or has the crude benefit all come this quarter.

V. Shankar No, as I said, crude benefit, the lead time is there. So, maybe it takes a little bit of time

for the crude to get reflected on to raw material and then from the raw material

purchase, once the inventory which we have purchased, the draw down, so, it will get

spread out over a period of time. Does not happen immediately.

Moderator Thank you. We move on to the next question that is from the line of Bhavin Shah from

JC Investments. Please go ahead.

Bhavin Shah Just wanted to have some clarity on the CRAMS business. What kind of capacity

utilization would we see next year with the order that you see regulatory clearance

coming in?

V. Shankar I have kind of explained this before in the manner that for new businesses, we are

adding facilities and we are doing as and when and the type of chemistry and reaction

it requires. So, it is not as if you know I have a capacity of let us say, 100 and this

order has come for 10 and therefore, my utilization is 10%. So, what we are doing is

because each product and each chemistry and each customer could come up with, that

is why it is quite longish, it is a 6 or a 7 stage building of relationships and it is quite a

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longish process of finally culminating into a contract manufacturer and it also, the

commercial order starts in crumbs and once it really stabilizes and suddenly, it picks up

into big numbers. So, the one which I mentioned to you is about totally new products,

totally new chemistry, and we had to demonstrate that we have the capability to crack

this chemistry to be able to do this product not only under lab conditions, pilot

conditions, bring out the stringent specifications it requires and take it to a commercial

scale. So, and the trail order which we got is the one we are hoping that the clearance

will come and we will complete in Q4 and give. While in terms of capacity utilization

and numbers, it may parse not be a big number to share. What it demonstrates for us

and what it helps me convey is a good news is that we are cementing a new customer

relationship. So, this is a and since they are all international and global customers who

got many-many products and many molecules, many intermediates, once the capability

and relationship is established, then the flow starts actually coming. So, it is difficult for

me to give a number just now. But I think it is a significant piece of information enough

for me to share that this is about getting one adding a new customer of an

international scale.

Bhavin Shah On the new product launches would you dwell a little bit more in terms are they tie-up

based products or do you have something innovative coming out. What sort of product

visibility in terms of pipeline we see monetizing going forward?

V. Shankar This year itself we have introduced not tie-up products, they are from our own research

centre and they are two big brands we are backing and doing lot of field work. One is a

product which goes by the brand name ‘Origin’ and this is first of its kind which is a

combination of an insecticide and a fungicide and this is been done by us. It is Rallis’s

own product.

Bhavin Shah Referring to the new molecule that would get launched?

V. Shankar For next year? We got a very good pipeline in fact over the last weekend only I was

with our research team. They were showing me a number of products which we have

ready. Now, it all depends on the regulatory clearance for us. We need to get the

regulatory approvals and depending on how, in what sequence they come, that will,

our introductions will depend on that. So, at this point in time beyond this, going into

specifics, I will not be able to. But I just want to share the good news that we are

ready to launch quite a few good new solutions.

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Bhavin Shah When you say sir new solutions, what they mean? It would be Section 931s ones, tie-

up ones, something that is completely differentiated, would that refer to that or would

it be maybe a little modified ones in the existing market?

V. Shankar These are new solutions in the sense that they are not ones which are already there in

the market. They are may not be totally new molecules also but they may be different

ways of combining existing molecules and they are original our registrations. They are

not the 94 me-too registrations.

Bhavin Shah Will be suffice to say that you have been waiting for these launches to come forth and

probably the age of registration is moved up close towards launch and we could not

see any deferral there.

V. Shankar Yes, we should, the sooner we get registration, and we will be. So, Kharif onwards, we

will planning for the launch.

Moderator Thank you. We have next question from the line of Prashant Kanuru from Karvy Stock

Broking. Please go ahead.

Prashant Kanuru Just wanted to understand in terms of crops in the Indian market importance of say,

Pulses and Oil Seeds versus Wheat; now, which of these drives the volume pesticide

percentage more? Would it be fair to say that Oil Seeds and Grams, i.e., Pulses drive it

or as compared to Wheat.

V. Shankar Prashanth, Wheat, the large portion of the Wheat requirement is in the form of

herbicides and while it has been an excellent Wheat season, consciously, we do not

play big in Wheat herbicides because the two big molecules which go into wheat which

is Clodinafop and Sulfosulfuron; they have become very low value products. It is very-

very generic commodity and there is very-very little hedge left there. So, and

depending on how the weather conditions prevail, if you taken a big call on sulfo and

the markets swings towards clodino, in the past we have burnt our fingers we are

sitting on inventory of sulfo because the fog happened a little more or little less or

ahead of or beginning of season or middle of season. So, it is a bit of a thing and all

this is worth taking when the margins are big enough for you to take that risk. So,

consciously, we do keep our presence but we do not play very big in Wheat. We are big

in Pulses and Pulses is good and we also have very-very good solution on pulses and

new molecule on Pulses also and we work very closely with the Pulses farmer on our

more Pulses. So, Pulses is an area of great interest for us, so our select Oil Seeds. So,

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for us I would say in general wheat wouldn’t get priority over this but for us certainly, it

is not wheat.

Bhavin Shah Sir, in pulses and oil seeds, it will be insecticides, fungicides, and herbicides; which of

these segments would be more?

V. Shankar Pulses, the insecticides are more.

Bhavin Shah Coming to your CRAMS, you talked about a new relationship forming over there. It will

be in pesticide technical and intermediates or just pesticide technical, what is it right if

it is pesticide technical or just technical?

V. Shankar No, as far as contract manufacturing is concerned, we are actually leaving the field

open to chemistry. We have expertise in chemistry. So they could go into different

applications. Actually, the one I refer to is the one trial order we are doing this quarter,

but there was one we did in the last quarter which is into Polymers that is a totally

different application. We have done one before that which happened I think in the

second quarter. We have actually done three or four trial orders already. That one went

into Animal Application -- Animal Hygiene. So we are open to even intermediates which

can go into pharmaceutical application.

Bhavin Shah: That is a very broad…?

V. Shankar: Yes, broad because here we are offering our expertise in chemistry, our expertise in

managing projects, our expertise in manufacturing, our expertise in able to be a reliable

supplier and also to build a trustworthy relationship. So, we are not limiting ourselves

to Agrochemicals; of course, Agrochemicals is our forte and anything comes that way

we are most delighted as well.

Bhavin Shah: Metahelix what is the loss for the first nine months cumulative levels?

V. Shankar: Metahelix I would rather urge you to look at; one is the top line which is the market

space we are building, because it is relatively a new space for us, it is not as mature as

crop protection for us in Rallis. And secondly, Metahelix, I would also urge you to look

at a cumulative number for the year. Because when you look at the Seeds business, it

begin with the Q1, where a lot of action happens and the rest of the quarters actually

we manage the whole season. So, what happens in other quarters is there are two big

expenditure which we have – one is it is not enough if we sell the seed. We have to

nurture a seed all through its life till it is harvested and we have to continue the farmer

relationship at every stage of the crop, the Seed business is very involved and very

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intensive that way. So, whether it is Q2 or Q3 or Q4, we continue to engage with

farmers and therefore there is a lot of field level activity. We also have to keep

demonstrating how good our seed is, how good the crop is, and we have all these

farmer activities, crop seminars and so on. Second thing which we do not relent and we

keep investing and working all through the year is in ‘Research and Development.’ So,

breeding program or field trial, the various research activities, we continue to spend.

But, accounting requires that having taken all the revenue in the first quarter

accounting standards do not allow you to book all expense in the first quarter and it is

proportionately only whatever I am able to sell in the other quarters I will take the

expenses. Since it does not happen that way, structurally therefore the other quarters

run into losses. I am also not saying that this can never be avoided is you have to be

very good at everything. So not only you are good in mathematics, you have to be

good in Sanskrit, you have to be good in geography, everything. So, if it is a quarter

where vegetables are sold, you have to have vegetables; if it is a quarter where Cumin

is sold you have to have in Cumin; Wheat is sold, but we are not in every crop and for

that matter I must say we are not even into Cotton in a big way which accounts for as

much as 50-55% of the market. So if Metahelix has already ramped up sales, which is

touching almost a healthy Rs.250-300 crores and being counted among the top 7-8

companies in Seeds, it is without Cotton largely and some of the big Seed companies

who rank 1,2,3,4, etc., are really Cotton-driven. So, we are getting our act together on

Cotton, in fact, we have just introduced some Cotton this year, which I have got very

good response. Imagine when we ramp up Cotton, and that is what we want to do and

we will do. So the answer to the quarter wise thing is how do I also be present across

all things which happened in different quarters and also how am I present in different

geographies. For example I told you in Rabi Bihar Maize is a big market and this is the

first season where we introduced a new Bihar type Maize which is high value, high

input-oriented but sadly for us the Bihar farmers decided to go out of Maize and do

wheat so it did not get a fair chance. So we are in the process of building portfolios like

this which will give us a presence in other quarter. Second is to go outside India and

market seeds in countries which have robust Q3, Q4, etc., which also is should happen

over a period of time for us. So this is just to explain the structure of the business.

Prashant Kanuru: Sir, just a last thing. Between cotton, corn and soya; corn and soya relatively more

stable in case of pricing as of now but cotton has seen a big beating in the international

market. So do you see corn acreage going up or soya acreage going up versus cotton

next year?

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V. Shankar: Farmers at the end of the day go by farm economics. At the beginning of the season

this year also we said that cotton is going to be down, etc., it ended up doing a record

12 million hectares. So not to worry India has become a leading player in cotton. We

are doing almost 400 now in terms of cotton production. We have become very big in

the world. These ups and downs will be there. Sometimes China cotton may drop; US

may drop; India cotton prices will go up and sometimes it may go a little down but

cotton is very big. Cotton has become remunerative and I do not see cotton acreage

falling drastically.

Moderator: Thank you. We move on to the next question that is from the line of Viraj Mehta from

Value Capital. Please go ahead.

Viraj Mehta: I just had a couple of questions. One was on Metahelix. If you can give us on 9 months

to 9 months compared to last year what has been the kind of growth?

V. Shankar: If we take the sales for the nine months I think there is almost a growth of 40% in

these nine months over last year and last year itself had grown handsomely over the

previous year. So we are recording as I said in a matter of may be 3 to 4 years we are

beginning to touch Rs. 300 crores which for the seed industry is quite an accelerating

performance. And on the bottom-line as I said we continue to invest so the bottom-line

growth is more of the order of 20% and this is a conscious decision by us that we need

to invest more into farmers, brand promotion and market development activities as well

as into the research and development programs and therefore and this is a conscious

investment which we will be making.

Viraj Mehta: Sir, as I understand and if we recollect our discussions a year back you had mentioned

incremental EBITDA above a certain level of sales is much, much higher. So if you had

to put in one figure beyond which incremental contribution would start going directly to

the EBITDA level. What would that number be in terms of sales for Metahelix?

V. Shankar: No Viraj, what we are doing is our EBITDA is steadily going up because our sales have

gone up; our level of contributions have gone up; EBITDA is going up. What we are

also doing is as we are able to generate more and from a loss not very long ago. Now

we have a positive healthy bottom-line. We are also increasing our research spends. So

we would really like to in Metahelix have the level of research percentage to revenue at

a very healthy level and this is going to be a knowledge led a science lead business and

we are as we can we are improving our facilities, we are deploying more resources, and

we are also adding on more crops on which we will do research on.

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Viraj Mehta: Any update on cotton that if I remember correctly in our conversation you had said that

we had applied for our own BT genes. Is there any update on that and we are basically

not buying it from Monsanto the gene?

V. Shankar: No, that is not true. We had invented our own gene now that gene is unique to us. But

that is the level one gene. The current bollguard equivalent products in the market are

two stag genes. Ours was not two stag we are working on further but the thing is that

field trials and new biotech approvals are not coming through. So right now most of the

licensees are of the same Monsanto technologies. What I said we have introduced this

season is the hybrids. So I did not mean sorry, if it was understood as technology.

Viraj Mehta: I understand your part. I was talking about like an analyst meet a year and a half back

probably.

Moderator: Thank you. The next question is from the line of Nitin Gosar from Religare Invesco.

Please go ahead.

Nitin Gosar: I just wanted to understand the market scenario. One is on the working capital and two

is on the farm economics where the end product prices have come down far below the

MSP or are they very close to MSP?

V. Shankar: On working capital situation is very difficult; extremely difficult. I am not particularly

talking about Rallis because as you know this is our prime focus area. We really do not

extend ourselves so much that we compromise on the quality just to buy some

additional top-line. We generally do not want to do that so we have a sharp eye on

cash and the debtors and so on and the average collection period but that is not the

general condition in the market place because our understanding is credits are very

long, the debts are in huge numbers, and therefore it is difficult situation overall

working capital. As I said earlier what has accentuated the problem is the severe cash

constraint because urea is sucking up all the cash in the market. Urea is in short supply

and all the cash is chasing urea and that is a very big industry and crop protection is a

small industry. So if that big industry sucks cash there is very little available. So we are

very, very conscious about this and therefore we are balancing both the sales and the

quality of sales and attempting our best not to lose market presence and therefore

doing the right type of sale so that it just does not go and sit somewhere and does not

improve our market presence in that sense. So we are working close to consumption as

much as possible. So that is what I would say on working capital.

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Nitin Gosar: And the other question was pertaining to the end product prices with regard to the

food grain prices. Are they very close to MSP, have they corrected far below MSP?

V. Shankar: Firstly, MSP is an excellent reference point because it is known to everybody that this is

the intended price or this is the minimum price at which a farmer should get but the

sad thing is that there is no formal structure all over the country whereby farmers can

go and get that minimum price. It operates very, very selectively particularly in some

northern states in some crops and unfortunately while last few years for most crops the

actual market prices have been above MSP sometimes far above MSP. I think now we

are seeing in some crops actually going below MSP. So there are pockets and there are

geographies where people are realizing paddy prices below paddy MSP. So in today’s

context it is different where there are geographies where people are not even realizing

the MSP.

Nitin Gosar: So the scenario in terms of farmer’s economics is far, far worse than what could have

been three months back? We are only struggling three months back with the erratic

monsoon now the commodity prices also which have come off?

V. Shankar: Yes, so if you take cotton few months back which was hovering around Rs. 6,000 come

down to Rs. 4,000.

Nitin Gosar: And sir, my final question was pertaining to some clarification on gross margin which

earlier participant was asking. Revenue minus the raw material so that number as a

percentage has gone far above what you otherwise generally report and this is almost

matching up with what happened in FY10 that is when the commodity prices also

corrected. So during this quarter did we see any kind of commodity or the input price

related benefit?

V. Shankar: No, we have seen some dip, there has not been a significant cost dip that way which is

driven by our commodity prices or anything. We think over a period of time because

now we are seeing some of the raw materials beginning to reflect drop in prices. Now

those raw materials now we have to buy. First we have the exhaust whatever we have

in stock so it will take some time. So a direct answer to your question is the Q3

numbers do not really reflect any big fall in the raw material prices into our numbers.

At least we do not have that.

Nitin Gosar: So it would be right to assume that despite some or probably there are no benefits

which is available from outside it is all about the sales mix that has improved may be

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on YTD basis or even on the third quarter basis because of which your gross margins

are looking better?

V. Shankar: Yes, but I am a little confused actually. You have to take all the thing including the

other expenses and you have to compute the margin. So if you take only one line item

and take revenues then it may not reflect.

Nitin Gosar: Probably we will have to wait for the annual report?

V. Shankar: Yes, please take all the elements of expense and thanks for giving me so much credit. I

also do not want to leave all the credits. We have improved our margins, it is not that

we have not improved. So certainly we have improved and we have worked hard for it

but I do not think there is an improvement of 600 basis points.

Moderator: Thank you. The next question is from the line of Abhijeet Akela from IIFL. Please go

ahead.

Abhijeet Akela: First, just to understand the one off item. So if you could just talk a little bit about what

those who have this; Dahej land charge and secondly the stock related adjustment

what exactly was it related to?

V. Shankar: The first one is related to the Dahej additional land which we have. So we initially

bought a plot of land on which our current factory is located. Then we were lucky this

happened a few years back the land adjacent just back adjacent to us was also

available which we bought because we have plans to expand and invest and grow and

the contract manufacturing business, etc. So which we bought a few years back so that

is also in our position. Now to consolidate and extend that there are as per the

regulatory authorities there are some charges which have been paid. So we have got

the approval and we had to pay those charges and since they are almost Rs. 2 crores

which happens to come in to this quarter we thought that we should just share that

information.

So that is on the Dahej land. On stocks-related adjustments this is as you know in any

manufacturing setup across the business we carry plenty of inventory which is spread

across raw materials, in-process, finished goods everything and from time-to-time we

have to recognize the entire stock in terms of its quantity, quality, valuation, and so on.

So as a result of this and looking at the usability of the stocks into the third quarter it

came to our recognition that we needed to make this adjustment of Rs. 5.4 crores to

record the fair value which we have taken it into the third quarter. Again given this

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amount we thought that it is good to highlight this separately so that it is known that

this figure is built in to the quarter numbers.

Abhijeet Akela: And just to clarify both these items are being shown under other expenses; is it?

V. Shankar: The raw material thing that goes into this material consumption.

Abhijeet Akela: And secondly just on the revenue breakdown just to clarify exports can we assume that

actually there was some YoY growth this quarter or would there are any decline?

V. Shankar: Exports as I said earlier we have had one of our big markets some orders which we

would have normally got because of the market conditions there but we could access

other markets. So exports have been while it has come closer to our intended number

we could have done even better. So I will have the exact number at the end of the

year.

Abhijeet Akela: And one last clarification. Given this correction in crop prices if we assume that crop

prices stay at this level until next Kharif season what would your sense be about how

sentiment might be next season, can it continue to be subdued or do you think if the

monsoon is better things will be better what is your assessment?

V. Shankar: Heavy commodity crop prices are directly influenced by demand supply like any basic

economic thing. So it is a little less complex than I think predicting FOREX movements

and other things which people try to... And therefore it is possible that the prices can

start firming up. They are also linked to what happens in international movements and

because it is an agriculture production related which is controlled by nature so to speak

a season failure here or a bumper there can have in one season a big influence on the

price. For example certain pulses which not long ago were seen as prices having

tumbled and fallen you can see Red Gram prices are quite high now. It is very, very

difficult to say or even conclude that it has gone down so it will remain down. It can

change even in a season.

Moderator: Thank you. The next question is from the line of Kuldeep Khanapurkar from Kotak

Asset Management. Please go ahead.

Kuldeep Khanapurkar: Just one or two questions. On the raw material earlier remark you said the prices have

gone down and the full impact has not been noticed in third quarter. Now I just wanted

to understand how much has been the correction in the raw material prices and second

question would be in the wake of slightly weaker demand environment would the

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industry and Rallis in particular be able to hold on to the prices or they would most

likely pass on to the farmers?

V. Shankar: Kuldeep, let me make a confession. I did not know that there will be much of interest

amongst all of you on exactly this crude and the linkage and I do not have a ready

number. So if you will pardon me I cannot give a ready number on what is the impact.

What I know for sure is that it has not been so significant that the Q3 numbers have

been very favorably kind of affected by this price drop. So that much I can tell you but

exactly how much has come in; what will happen in Q4 I do not have a ready thing. So

but that since so many of you have asked that question I think my team and I will just

look into that and see what impact it makes.

Kuldeep Khanapurkar: Now before second actually the reason probably everyone is asking is also if you adjust

for the inventory hit that you have taken that is one time charge that you said. The

expansion in your gross margin is almost to the extent of 700 bps and that is the

reason probably everybody is wanting to understand this part. But anyway I think

maybe you have not quantified it in that way. So on the second part was really given

the poor volume growth would there be a price correction going into the next season or

you do not think that is the case?

V. Shankar: Yes, let me make a few comments on your first one. As I said earlier just do not take

the raw material you must take the other expenses everything together to assess the

gross margin or better still you look at the EBITDA number. Because the reason I am

saying Kuldeep is that see in our portfolio, in a way that is a blessing that we have a

mix of two or three ways of providing solutions. One is we have our own research; we

buy raw materials; we do the entire backend manufacture; we do the technical; we

formulate. So that has one kind of costing. The second one is we have strategic

alliances where I would get the active ingredient then I buy other materials then I

formulate then I bill my own brand. Then there is a third segment which is sometimes I

actually do co-marketing of select products with certain partners where I do not have

to go through all these process. So depending on a particular quarter and the type of

products I am selling depending on which basket that comes from your mix could be

different. So it may not actually be enough for you to take one line item. Because my

mix may change from quarter-to-quarter or it appears not only in one line item it

appears across line items. So unless you take all of them and look at it together saying

that what is my total cost of goods sold it may not reflect the margin in its entirety. So

that is the way I would encourage all of you to look at it. Certainly if you add back

these two items and I think conceptually that is not a wrong thing to say that they do

not entirely pertain to this quarter so why do not I add back to get the real underlying

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performance of the quarter I would not argue with you I would say that Yes, that is not

a wrong approach please do that. But what I am saying is while you do that and I

endorse your approach please also take all the expenses do not take one or two line

items.

Kuldeep Khanapurkar: No fair point. I think even if you add that the operating EBITDA level there is a 250

basis point of improvement?

V. Shankar: Yes, that is correct. If you add that I said 100 if you add that it becomes 250 that is

fine.

Kuldeep Khanapurkar: So the next obvious question is whether you will be able to maintain that kind of

improvements into the coming quarters given the demand-supply situation at the

market?

V. Shankar: See it all depends as I said one component of that is also the product mix. So

depending on what is in demand and my preference is always to sell my branded my

own proprietary value added products. That is my first call. So if you look at like the

products I have like my Takumi, my Ergon they are all premium products. My first

preference is there. They are actually grown. So some of these products I have been

able to effect price increase because this is where most of my investment go in building

farmer relationship and establishing brand. Equally they have been some brands where

they may be also a big contributors in revenue, etc., where because of huge

competitive pressures some inventory pressures not my inventory but pipeline

inventory in the market place I had to take price calls. So going forward when you say

will you be able to maintain prices I only want to say is that it is not that I have

increased prices across the board now question of maintaining it have also taken calls

on price reductions. So the same approach will happen we will evaluate every

opportunity and whatever is appropriate we will do. So the intent of course let me say

clearly that the intent is to maintain the quality of the operations. But depending on the

final mix I make so it may be 50 basis points here plus or minus but the intent is to

maintain and attempt to improve the quality of operations and the margin.

Kuldeep Khanapurkar: And also have you seen the mix volatile across seasons or you think once you achieve a

certain kind of mix you can only improve from there or you think it is volatile across

seasons?

V. Shankar: Now it depends on the pest attacks. You have heard about the brown plant hopper,

right that is a very dreaded pest on paddy on which we have an excellent solutions.

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Now if there is a severe attack in a particular season my marketing response would be

slightly different from a season where there is no attack and we are well-prepared with

that, etc., and we are encouraging farmers only to prophylactic spray. I cannot have

very aggressive positions in that context. So actually it is difficult to say that one

season this happened and therefore this is the stable one and I only build on here from

here onwards like that. Soya herbicide a runaway aggressive market last few years this

year it has been a disaster completely. In fact thankfully we do not have big positions

there but it has been a very, very different situation on what marketing you would do in

previous years and what you could have done this year.

Moderator: Thank you. The next question is from the line of Pulkit Agarwal from Karma Capital.

Please go ahead.

Pulkit Agarwal: Just wanted to ask you for the next two to three years if we look at Rallis India’s

business which products or business or geographies do you see driving revenues in

margins? And also if you provide any guidance?

V. Shankar: See let me try and answer your question at a slightly higher plain. Seeds as a category

and as an agri input category and a business is quite robust and growing at anywhere

between 10% and 15%. And most of the crops they are growing barring some core

serials like Jowar and all that which is steady to decline. So it is a good category. As

long as you are having value creating solutions there you have a good set of solutions

and you have good relationship program and capable work happening at the field.

Equally in crop protection there is a need for crop protection and more and more

emphasize is on sustainable solutions, paper solutions and higher value solutions which

can also generate higher value and give you good quality and output. So in value

added segments for example can I even export those. So there is a good requirement

and need for both. So given some kind of a baseline I would say that in both these

categories progressive businesses looking at value-creating solutions it is actually very,

very exciting opportunity and farmers will prefer good value-creating solution and not

so much weaker on unit prices. In the crop protection category let me also add that

category like herbicides which used to be very small not very long ago is increasing at a

very, very fast pace poorly because it brings in a label saving device it helps in cutting

down costs and agony for the farmers in finding adequate labor to do the farming.

There is also a lot of requirement of fungicides particularly on fruits and vegetables and

fruits and vegetables has been a growing category in India and value-added foods a

vegetables are increasing in a very handsome way.

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So these are all good opportunities unfolding there is room for good technology, there

is room for value added solutions. So I do see that all these categories have very, very

robust future. We also are seeing a good acceptance and a good acknowledgment of

paper solutions and greener solutions. So in our own portfolio in the last three to four

years we have been steadily and consciously increasing greener products. We have also

introduced organic products particularly in PGN and the GOB in soil conditioner they are

fully organic they are green products and we can see lot of traction also in this

category.

Last but not the least and we have discussed today also extensively is on

manufacturing and if anything this Make in India campaign and the focus of the

government only augurs well for this I think India is more and more becoming a

preferred destination for manufacturing and our own foray and focus into this area.

While I know it is testing all our patience and more than your patience it is testing my

patience which is taking its own time in building the business but I know for sure that

this is a healthy category to be into and it has a great future. So these are some of the

things which I will say and share which are part of our strategy anyway.

Pulkit Agarwal: Sir, is there any revenue CAGR target that you would be happy with in achieving over

the next five years and any profit margin numbers that you look to achieve that you

would be comfortable with?

V. Shankar: No, if you are asking forward looking number I do not do that. So I think I have

described enough on what is on our agenda and I will leave it to your own

interpretation please.

Moderator: Thank you. We have the next question from the line of Satish Mishra from HDFC

Securities. Please go ahead.

Satish Mishra: Sir, just last one question. What would be the CAPEX going forward considering the

pickup you are seeing in custom synthesis business?

V. Shankar: We have not planned for any major project in CAPEX so we would be doing in our

normal range of anything between Rs. 50 crores and Rs. 100 crores and right now all

our CAPEX is really focused on getting all our current projects up to speed; current

opportunities up to speed. So we have not quite thought about investing big in to a

new project just now.

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Satish Mishra: And sir, just in custom synthesis you have highlighted that we went through trials of

some of the products in Q1, Q2, and Q3 also so how has been the response?

V. Shankar: Trials of which one please?

Satish Mishra: You said we had trials of some products in Q2 and Q3 also which were related to

polymers or animals related stuff?

V. Shankar: Yes, not only trials we have also dispatched some test orders already. So they are into

commercialization stage. Now we have to wait for bigger orders of that.

Satish Mishra: But the regulatory hurdles are over for those products or still it is in that?

V. Shankar: Yes, they are over.

Moderator: Thank you. Ladies and gentlemen, due to time constraint that was the last question. I

would now like to handover the floor back to Mr. Nikhil Gholani for his closing

comments. Over to you, sir.

Nikhil Gholani: Thank you Karuna. We would like to thank all the participants for the time and do

apologize for the constraint of time. Thank you Mr. Shankar, Mr. Venkatadri, and Mr.

Ashish for the detail discussion. Thank you so much and have a wonderful day.

V. Shankar: Many thanks Nikhil and many thanks to all participants from all of us in Rallis.

Moderator: Thank you very much, sir. Ladies and gentlemen, on behalf of Tata Securities Limited

that concludes this conference. Thank you for joining us and you may now disconnect

your lines.